Soriano: Challenges and troubles ahead for the founding generation

WHEN a business owner dies or becomes permanently disabled, the business itself may die or be permanently disabled on the same day – not because something wrong was done – but because nothing was done!

According to a Forbes article, when Samsung Electronics chairman Lee Kun-Hee suffered a heart attack in May, investors began to consider the impact that a sudden, accelerated leadership succession might have on the company. Lee is expected to eventually hand the reins to his son, Lee Jae-yong, 45, who has worked at the company in various capacities for 23 years. Does the younger Lee have what it takes to steer Samsung forward in today’s competitive business environment?

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The founders of most family businesses are now looking at their own children and wrestling with this same question. For them, the next five years is critical. This is the peak succession period as 30 percent of family-owned firms will experience a change in leadership due to retirement or semi-retirement.

The Forbes article further added, “after decades of hard work and sacrifice to make their enterprises successful, they want to ensure they are “built to last” – a legacy that will help support future generations.”

In my work as a family business coach in the region, one of the most important factors that affect family business transactions is the lack of a clear, well-defined business succession plan. The lack of such a plan may create a conflict between the potentially inconsistent goals of family unity and the continued financial success of the business.

Another very important factor is the failure to address the issue of who will run the business – the issue of “control.” In an intergenerational (2nd Generation) or multigenerational (3rd Generation) family of several siblings and cousins, this poses quite a challenge of choosing a successor and can cause sleepless nights for the patriarch and senior generation members.

Additionally one other neglected factor is the failure to ensure that the surviving spouse has a market for the business ownership that they have inherited and sufficient income that will reasonably last for their projected lifetime.

Without a well-defined business succession plan, the family business will collapse!

The reason why we are talking about these issues is that proper business continuation planning canensure the future succession of the business, andavoid conflicts between the remaining owners and the family of the deceased owner.

What events do we need to plan for? There are many events that can disrupt or put the business at risk, but the most common ones include:

1) The death of an owner

2) The disability of an owner

3) The bankruptcy or divorce of an owner

4) The retirement of an owner, and

5) The withdrawal for whatever reason of an owner prior to retirement

When we use the term “business succession plan” it actually has several components.

First of all there is the human component. The second major component is the agreement itself.

The “human issues” in a succession plan

This component is often the most difficult and challenging part of the succession planning process and the reason why many owners never get their planning finished.

For starters, you need to look at your business and ask yourself:

1) Who are my key players?

2) Have I promised ownership to anyone other than my existing partners?

3) Are there family members already working in the business and how do I judge their commitment to the business for the long haul?

4) Is there an “heir apparent” for control of the business? Did I promise that person they would have control?

5) Are there family members or in-laws who are not currently involved in the business but will want to be a part of it in the future? This could be family members who are children or students who plan to enter the business in the future.

There are many other important questions that affect the long-term survivability of the business. Due to space constraints, I will tackle those questions in another column.

For now, the message to the founding and senior generation leaders is loud and clear.

Do not neglect or set aside the issue of business succession as the “Do Nothing” option has dire and irreversible consequences.It is not only the least logical, the most costly, the most destructive, and yet sadly and by far and away the most popular!

(Professor Soriano is an Asean Family Business Advisor and Chair of the Marketing Cluster of the Ateneo Graduate School of Business. He will be facilitating one of his best selling 1 day workshop on September 19, 2014 Friday, entitled The Challenges of Managing a Family Business at the Crowne Plaza, Ortigas Center. For further inquiries please visit wongadvisory.com or contact Allen at 09228603186 for details.)

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